How can the labor market equilibrium be affected by supply?
1 Answer
Equilibrium in labor markets responds to supply much like other markets - when labor supply increases, this puts downward pressure on wages but tends to increase overall employment.
Explanation:
In general, when the supply curve shifts to the right (increase in supply), the equilibrium price (in this case, wages) will decrease while the equilibrium quantity (in this case, jobs) will increase.
One tricky part of this analysis is significant disagreement about whether the supply for labor is price inelastic or price elastic. If labor supply is price inelastic, then a decrease in wages will not lead to much decrease in overall employment -- and likewise, an increase in wages will not lead to much increase in overall employment (or willingness to work). In other words, a price inelastic labor supply curve is steep, or close to vertical. If labor supply is price elastic, then the labor supply curve is flat, or close to horizontal.
The trouble is that economists seem to disagree significantly about the actual elasticity of labor supply (and perhaps disagree about elasticity of labor demand, as well). I think we should remember that not all labor is equivalent, so perhaps we should consider not one, single labor market but the market for labor in each industry, or even for each job category within each industry. The narrowness or breadth of the market definition also impacts the price elasticity of demand (and maybe the price elasticity of supply).
Ignoring these issues for a simpler explanation, we can review the standard factors that tend to shift the supply curve, and apply them to labor in various markets:
1) Prices of related goods - when prices of other goods increase, supply often decreases as producers choose to produce more of those other goods. In the case of labor supply, this would refer to wages in other labor markets.
2) Number of sellers - in the case of labor markets, entry or exit of lots of potential workers would impact supply. An increase in immigration or simple changes in demographics of a region could increase or decrease labor supply.
3) Prices of relevant inputs - this is difficult to analyze for labor markets, but I think we could consider the cost of education to be an input to the human capital required for many labor markets. Higher costs of education could, in some circumstances, reduce the supply of labor.
4) Technology - this is even more difficult to apply to labor, but perhaps an analogy would be improved productivity (also related to human capital but affected by capital investment as well). Higher productivity might lead to more willingness to produce at the same wage -- but that implies a wage based not on time but on output. In most developed economies, we don't have 'piece work" wages, but we do have some situations where workers are paid bonuses for increased productivity.
5) Expectations - in labor markets, this relates to expectations about future wages and decisions to produce during different time periods, but I think labor is not too likely to decrease much in the current period just because workers expect higher wages in the future.
While the basic supply-and-demand analysis follows the same pattern as other markets, remember that demand for labor is derived from the demand for the output, and remember that the overall labor market can behave quite differently from specific labor markets in specific industries.
